With an average per capita income of a mere US$2,600 per annum – just below Sudan, Pakistan and Laos – Nigeria epitomizes the problems of the ‘resource curse’, the paradoxical phenomenon of resource-rich countries becoming poorer. Despite ranking tenth in the world for proven oil reserves and seventh for gas, the country has become renowned for its corruption, violence, poverty, environmental degradation and regional divisions. It is reliant on hydrocarbons for 97% of its export earnings and 78% of government revenue, but despite a ten-year surge in oil prices, in early 2013 Nigeria stood almost alone in its failure to make progress towards the Millennium Development Goals, ranking alongside war-torn Democratic Republic of Congo, while 30 other countries in sub-Saharan Africa were commended for their progress.
However, the Nigerian government has been attempting to reform its finances as well as its transparency and accountability. Key to this has been the Petroleum Industry Bill (PIB), first drafted as policy in 2007. It has been an ambitious attempt to consolidate approximately 16 pieces of former legislation, some more than 50 years old. The Bill’s original aims were to tackle the twin problems of inefficiency and corruption in the industry. However, its progress has been tortuous and stop-go, the subject of intensive oil company lobbying, corruption and politicking. In 2013, the abandonment of its guiding principles has led many observes to conclude that the legislation is now in tatters. Whether the PIB will actually become law is still unclear.
An Ambitious Bill
The original Bill had three key aims. First amongst these was the commercialization of the industry and the removal of government from technical decision making. Primarily, this involved a fundamental reform of the Nigerian National Petroleum Corporation (NNPC) which, according to Revenue Watch, has the reputation of being one of the world’s most closed companies and a ‘slush fund’ for government. The original plan was to establish a new national oil company within three months of the Bill being passed that would be independent of government. However, by 2012 the plan had become one of breaking the new NOC into three entities, privatizing only two of them and leaving the third open to political interference. The 2013 revised version appears to be a further compromise from the original Bill, disappointingly thin on details of exactly what assets the new NOC will hold or when it will be sold off, whilst apparently leaving the old NNPC in existence and able to maintain its current contracts with the oil majors.
The second aim was an increased sustainability of government finance, to be achieved by improving the ‘government’s take’. Apart from the hope that a new profit-driven NOC would be able to double exports and therefore taxable profits, the PIB also aimed to improve production with new relinquishment provisions that would allow the government to take control of any acreage that companies left idle.
Relinquishment has been strongly opposed by the international oil companies, as have proposals for a new Nigerian Hydrocarbon Tax (NHT) on upstream profits and the extension of the Companies Income Tax, currently only applied in the downstream sector, to production. In order to address the specific problems of the Niger Delta, the Bill also proposed that companies contribute 10% of net upstream profits to a fund specifically aimed at benefitting the people of the region. Although these new fiscal arrangements appear to create a relatively high taxation level, this is largely mitigated by various flexible allowances.
Increased Transparency and Accountability
Nigerian President Goodluck Jonathan believes that the Petroleum Industry Bill (PIB) will be passed and will enable transparent and accountable operations in Nigeria’s oil and gas sector. Source: Copyright World Economic Forum. swiss-image.ch/ Remy SteineggerThe third aim was transparency and accountability in all dealings with oil companies. These proposals have been the subject of hard IOC lobbying, and in May 2013 it became clear that many key elements had been dropped, including all requirements for publication of the amount of oil pumped and the amount paid to government. All transparency regarding signature bonuses, the Companies Income Tax and the Nigerian Hydrocarbon Tax is gone. It is proposed that royalty taxes will be made public.
Given the stated aims of the Bill, the expanded role of the Minister for Petroleum Resources has provoked great controversy and may still prove to be a sticking point. The Bill proposes that the Minister will have relatively unchecked supervisory powers over nine new agencies, each with a paid board and therefore representing an opportunity for patronage. Distribution of the 10% Niger Delta fund will also be at his or her discretion with little transparency; similarly the Minister will have the power to determine many aspects of contracts with very little scrutiny. In fact the latest version of the Bill is reported to explicitly allow the Minister and directors of state institutions to receive ‘gifts’.
A Costly Six Years
Nigeria is the largest oil producer in Africa, production disruptions mean that it is producing well below capacity, while proved reserves have not been increasing..Source: BP Statistical Review of World EnergyIn November 2012 there was a relatively unusual intervention from Oxford economist Paul Collier, urging the government to stand firm against the IOCs and pass the Bill as it stood. Nigeria has lost a great deal in the six years of deliberations – there have been no licensing rounds, no signature bonuses, a fall in production, and much needed power-generation reforms have been put on hold. To add to the challenges facing the country, demand from its major market, the US, has been shrinking as North America taps into its shale reserves; in 2013 this is reported to have led to a fault-line emerging within OPEC, between the producers relatively untouched by shale production and those that are affected – headed by Nigeria. Advances in LNG infrastructure have brought new competition from Australia and Indonesia. Within the country a state of emergency has been applied to three northern states and in February this year there were strikes within the Onne Oil and Gas Free Trade Zone with workers accusing companies of ‘enslavement’ and victimization.
The reaction from the majors has been a gradual divestment from onshore and shallow-water production. Some existing licenses have been renewed, but it is unclear whether these are exempt from the PIB. Concerns have been raised that agreements have been made with several newly formed companies who appear to have little technical capability. The International Energy Agency is predicting zero production growth over the next five years.
A Nigerian Spring?
Corruption is clearly key to the country’s problems: in May this year it was revealed that illicit financial outflows have made West Africa, led by Nigeria, a net creditor to the world, contributing an extraordinary US$494 billion over the last 30 years. As many observers have commented, the IOCs have profited greatly from this environment, clearing an estimated $100 billion in revenues over the last decade.
However, it is just possible that this culture of opacity and toleration may be coming to an end, with some commentators pointing to a ‘Nigerian Spring’. Ordinary people have become more vocal in their condemnation of corruption and openly angry with their government, fueled further by last year’s revelations of a nearly $7 billion fuel subsidy fraud.
Whether this public anger will translate into a new public culture remains to be seen. It appears unlikely that it will be sufficient to bring about a meaningful Petroleum Industry Bill. Possibly one day the full account of how the Bill was killed will be written. Its failure will have lasting repercussions on the country’s population of almost 170 million, Nigeria’s role as a regional power and as the holder of world-class reserves. This lost opportunity will leave Nigeria and the world at large with much to regret.
